By CA.Dr.Rajendrakumar Jain

Until few years ago it was a popular notion that “wealth tax” is for super rich citizens and not for common people. But rising prices of property, gold, silver have changed the scenario. Now a decent flat costs nearly crore rupees, gold costs 2800 a gram, this price rise made majority middle class people overnight “Crorepati” this change will bring a majority of the citizens in the wealth tax net. Hence, it is imperative to know about wealth tax.

Background: How to raise revenue has always been a challenge for any government. Particularly at the time of independence, our country had scarce resources, moreover, “95% of the nation’s wealth was in the hands of 5% people and remaining 5% wealth was with 95% people”. This uneven distribution of wealth was a great challenge for the government. In order to make the equitable distribution of wealth and to raise the source of revenue, in 1957 the Government had for the first time introduced the Wealth Tax, and subsequently it became a permanent feature of Direct Tax. Even the forthcoming Direct Tax code proposes to continue with wealth tax , so it seems that now wealth tax has occupied permanent place on statute book and we have to live with it .

It is customary that in every budget some changes are incorporated in the direct taxes provisions as per the need and thought process of the law makers. In wealth tax too, from its introduction every year some or the other changes have been incorporated. But in 1992, the then Finance Minister brought about a revolutionary change in budget proposal. It was announced that, “ in order to boost the economy and build the capital, wealth tax will be levied only on non-productive assets and exemption limit of wealth tax was raised from the then existing Rs. 2,50,000/- to Rs. 15,00,000/- and the tax rate was also changed from progressive tax to uniform tax rate i.e.1%”.

As compared to the 1992 scenario, the situation turned completely in 2011. The gold prices shot up from 4200 tola to 28000 per tola, silver prices inflated from 6000 Kg. to 62000 Kg. Real estate prices touched the sky, and started quoting in Crores. Whereas wealth tax exemption limit which was 15 lac in 1992, it has been raised to 30 lacs in 2010.

With the growth of economy the wealth has started flowing in the hands of the masses and as a result a second flat / farm house / second car, are become a common feature. The flip side of this growth is it brought most of the people in the wealth tax net.

It is expected that tax laws should be easy and simple to comply and understand , but Our Direct Tax Laws are flooded with deeming fictions, these deeming fictions give very “irrational and unbelievable “ meaning to a word, which makes tax laws and its compliance complicated . Inspite of all the claims made by the government for simplification of the law, it is a nightmare for a common man to comply with tax laws. And non compliance attracts very heavy penalty and harassment. Therefore, it is better to get acquainted with legal provisions .

Wealth tax is applicable only on three entities – Individuals, HUF and companies (both private limited and public limited).

Under wealth tax only specified assets are taxable and not all the assets held by the assessee. Taxable assets are defined in Sec.2(ea) of Wealth Tax Act, Rest all assets irrespective of its value are exempt from wealth tax.

Following are the specified taxable assets .

Land and building – [sec 2 (ea)(1)]
Under sec 2 (ea)(1) each and every building or part of a building / flat is covered whether used for residential or commercial purpose or for the purpose of maintaining a guest house Including a farm house situated within twenty five kilometers from local limits of any municipality ( whether known as municipality , municipal corporation , or by any other name ) or a cantonment board.”

As explained earlier, the law makers wanted to tax only non productive assets. A few exceptions have been provided in this section like Residential house given by a company to its employees , house / flat held as stock-in-trade or house used in own business or profession or residential house given on rent for minimum 300 days during the previous year.

This is the most disputed and controversial taxable asset class which raises so many questions like, what will be tax position if the possession of the property is taken for the first time and it has been rented out for less than 300 days or what will be the tax treatment in case of deemed let out house property or using the house property for own business but not forming a part of the block of depreciable assets.
Motor cars – [sec.2(ea)(ii)]
Any motor car is an asset except motor cars used by the assessee in the business of running them on hire, and motor cars treated as stock-in-trade. It is irrelevant whether you own a single motor car or a fleet of motor cars, whether a car is meant for personal use or business purpose it will be added to your wealth. But motorbikes are exempt from the clutches of wealth tax.

Jewellery, bullion, utensils of gold, silver etc. – [Sec.2(ea)(iii)]
Indians are known for their love for precious metal especially gold and silver. For a middle class Indian family to hold 50- 60 tolas of gold is very common. This section covers gold, silver, any precious metal, stone or its alloys or any combination of it, excluding items held as stock-in-trade.

Gold ETF (Equity Traded Fund) are out of the purview of wealth tax i.e. gold traded funds are the funds and not the gold, people are holding the fund certificate and not gold as defined in the act even though the underlying asset in the certificate is gold.

Yachts, boats and aircrafts – [sec.2(ea)(iv)]
It is not very fashionable except for super rich people to keep yachts, boats and aircrafts hence not elaborated on it .
Urban land – [sec.2(ea)(v)]
With growing urbanization and increasing prices of land, this asset class will have great impact on your wealth tax liability. Urban land includes both, agricultural and non agricultural land, which are situated within municipal limits or with in the radius of 8 km of municipal limit.

To this section the following exceptions are provided

Land on which construction is not permissible under any law like, land reserved for public purpose like play ground, garden etc.
Land occupied by any building which has been constructed with the approval of the appropriate authority.
Any industrial land upto 2 years from the date of its acquisition.
Any land held for stock-in-trade for a period of 10 years from the date of its acquisition.

Cash in hand – [sec.2(ea)(vi)]
Cash held, more than Rs.50, 000 by individual and HUF is taxable and in the case of companies, any amount not recorded in the books of accounts. Therefore, unlike individuals and HUF there is no monitory limit for companies to hold cash.

While computing taxable wealth in addition to above assets “deemed assets” are also included and “exempted assets” are excluded. Also debts ( loan /borrowing ) in relation to taxable assets will be deducted from taxable wealth .

Under sec. 5 of the act various assets have been exempted. But the most important is sub section VI whereby one house or part of house belonging to either Individual or HUF is made exempt.

Secondly, a plot of land comprising of an area of 500sq.mtrs or less is out of the purview of taxable assets, this is a great respite to public at large.

Valuation of assets

The wealth tax liability depends on the market or net realizable value of the asset on the valuation date. The valuation date is 31st March of any year. Now the question arises, how to do valuation of asset? The valuation of asset shall be taken in the manner laid down in the schedule III of the act. Various formulas are given in the said schedule, like, In case of house property the valuation depends on gross maintainable rent and net maintainable rent. Actual price of the property or book value of the property or Market price or ready reckoner price has no relevance for calculating taxable value of the property.

While valuing gold ornaments all the factors which are considered while selling gold need to be considered, ornaments are generally made in 22 caret gold and not 24 carets. There is always a rate difference in gold sale rate and buy rate, while selling gold, 7 to 8 % is deductable on account of impurity / mixing in the gold ornaments.

Another important feature of tax scheme is, it is not necessary that all the assets must appear in the balance sheet of the assessee, but asset must belong to him. Wealth tax is always payable by the owner of the asset. Few exception of deemed assest is given in the statute where the assessee has to pay tax for the property held by other person .

Incidence of wealth tax depends on two criteria-

Residential status and
citizenship
In case of an Indian citizen, who is a resident, his global wealth is taxable in India. In all other cases only their local wealth (i.e. wealth situated in India) is taxable.

We have DTAA (Double Tax Avoidance Agreement) for wealth tax with few countries. In countries with which India doesn’t have a treaty, but the citizens of India pay wealth tax in that country, a relief can be claimed by such citizens while paying Indian taxes.

The author CA.Dr.Rajendrakumar Jain is a Mumbai based practicing chartered accountant and can be contacted on rajendra.jain@rijainca.com or mob. 9869081100

Due to downturn in real estate market realty investors have set second homes as their new target for investment in property market. Hundreds of real estate investors are looking to invest in second homes to earn profit from this source, sources said. The most important point while investing in buying home choosing the right city or location.
“The focus should be on properties that have potential for assured rental yields and capital appreciation. This comprises residential projects near to commercial areas as well as industrial zones,” sources said.
There are several points should keep in mind while investing in second homes:
•The area where a second home is located should show promise of development in the near future.
•There should be good development in the second home scheme itself.
•The property should be very well maintained in order for it to be able to attract attention of prospective future buyers.
•The project should have good amenities and conveniences which can attract the interest of the buyer and make the investment worthwhile. Special emphasis is laid on recreational amenities, health related amenities and lifestyle.
•An attraction like a popular restaurant, spa, picnic spot, resort etc being part of the project is an ideal scenario. These attractions ensure foot falls in the project from outsiders, make businesses in the project viable and ensures that a resale market is created as there will be demand for properties for sure.
•The presence of such attractions also ensures that the second home project is well maintained, kept clean and attractive.
•This ensures that a resale market is created which ensures liquidity which makes the investment very lucrative and dynamic in ones portfolio.

By Accommodation Times (www.accommodationtimes.com)

The Fund marks the India Infoline group’s successful foray into the private equity space

Mumbai: India Infoline Venture Capital Fund (“IIFL VCF”), the venture capital arm of India’s leading financial services provider, the India Infoline group, today announced the successful completion of IIFL Real Estate Fund (Domestic) Series 1 (the “Fund”). The Fund has collected Rs. 500 crore. This is the IIFL group’s first foray into the private equity space.
The Fund will have a term of four years from the Initial Closing Date, which may be extended up to two years. IIFL Alternate Asset Advisors Limited is the Investment Manager of the Fund.
Mr. Balaji Raghavan, CEO and CIO of IIFL Alternate Asset Advisors Ltd. said, “We are highly encouraged by the response to the India Infoline group’s first real estate fund and successful foray into private equity. The corpus raised indicates the confidence investors have in our fund and the IIFL group in general. We will target deployment during the current year itself, focusing on leading and promising projects of top developers in major cities that are ongoing or to be launched. The target is to give Fund’s investors enhanced returns, backed by securities of quality assets and collaterals which have periodic cash flows.”
The focus of the Fund mainly remains on the real estate sector in India and by investing in equity, debt and equity linked Instruments of promising real estate and construction companies, which are involved in projects or ventures, having significant growth potential.

By Accommodation Times (www.accommodationtimes.com)

According to the 2011 census, the Mumbai Metropolitan Region has over 23.5 million people. To house this population on the ground floor, assuming a household size of 4 and dwelling units of 900 sq ft per family which are laid wall to wall, we would need 121,384 acres of contiguous land. If all these houses are built facing the street (for access), providing a frontage of 20 ft to each unit, the total length of the street would be 35,606 kilometres.
Being the commercial capital, the city not only attracts migrants from all parts of India but also has a high floating population which commutes to the city for work everyday. This high density calls for developments to be vertically stacked by design, with multiple functions layered one over the other. Nevertheless, the proposal for increasing the Floor Space Index (FSI) in the city (which would enable more construction over the same land area) has always met with stiff resistance on practical, sustainable and ethical grounds.
Permissible FSI in South Mumbai is 1.33, while that in the suburbs has recently been increased from 1 to 1.33. Additionally, developers can purchase Transfer of Development Rights (TDRs) and construct up to a FSI of 2. However, this is low when compared to global destinations such as Singapore, New York and Hong Kong Island Urban Area, which have FSI of 5, 10 and 12 or above respectively within a radius of 10 kilometres from the city centre. What does this imply for Mumbai real estate?
Real estate developmental density in Mumbai has not kept pace with the growth in population density. Due to the huge pressure on the city’s already scarce land resources, market forces have tended to circumvent the base FSI regulations and build more through ‘discretionary approvals’ in lieu of construction of civic amenities such as parking structures. Also, certain construction features which were excluded from FSI – such as balconies, flower-beds, voids and niches – were manipulated so that they could be utilized as habitable spaces after construction. These innovative circumventions of building regulations could justifiably be called ‘creative feedback’ from the industry.
Last week, the Government disapproved of these discretionary approvals for construction and came up with amendments in the Development Control Regulations. To increase transparency and remove layers of regulations, an all-in FSI calculation which includes the FSI-free design features has been stipulated. In lieu of lost volume of construction, developers can build 35% extra (as Fungible FSI) by paying a certain premium to the Government. This could keep the construction volumes nearly the same, as developers used to overbuild nearly 25%-30% as FSI-free features.
However, developers would now be more inclined to include this extra 35% as usable carpet area in the properties, resulting in better efficiencies in terms of carpet area-to-saleable-area ratios. We could see more box-like residential towers which provide a maximum habitable area to the tenant, instead of lavish architectural projections such as balconies and other design features. The purge of discretionary approvals would also make the industry a more level playing field for developers.
The moot point to debate is – is Mumbai building enough? Should FSI be increased from its current level of 2 to 5 or 10? The issues are as much scientific and statistical as they are ethical. Some points to ponder:

• Strategic densification through a differential FSI regime based on micro-zoning instead of the current uniform FSI system is the key for balancing densities with infrastructure
• Construction volume depends directly on the carrying capacity of developed infrastructure in terms of roads, water and power. Hence, permissible FSI can be mapped with projected completions of infrastructural projects, leading to zones or corridors of high-density development.
• Urban renewal should not be blindly incentivized by higher FSI as it might lead to congestion in zones which have older properties
• Strategic densification of suburban nodes could be explored as development of infrastructure is convenient at low-density locations
• Premium monies collected for higher FSI should be compulsorily ploughed back through investments in infrastructural development

By Accommodation Times (www.accommodationtimes.com)

In hindsight, real estate has been a common sensical way of prudent investing. Any investment made during 2001-2007 has shown healthy positive returns over medium and long term horizon of 3-7 year. Come 2008 and the returns on this asset class has not been a one way journey. Investments made in 2007-2008 may not have yielded any positive return. 2009 was another good period for direct real estate investment due to correction in prices. However the same cannot be said true for 2011. With global uncertainty, inflation and high interest rate the investors are compelled to ponder at direct investment strategy.
The key risk being undertaken by a direct investor in under construction project is developer risk and completion risk. Developer risk is more on account of overleveraging and over commitment. Completion risk is on account of quality and committed time duration. Another unforeseen risk in case of direct investment is that of concentration risk since a typical investor will have an understanding of one city where he resides. This risk is being more appreciated by investors in Hyderabad due to current socio-political crisis prevailing in the state. It is rightly said “Do not put all eggs in one basket”.
In case of direct investment the end product price has to appreciate after netting off stamp duty and registration cost to make decent returns Eg. Rs 5000 per sq ft should become Rs 10,500 per sq ft to absorb stamp duty/registration cost of Rs 500 per sq ft and balance Rs 5000 per sq ft will offer 26% IRR (Internal rate of return) over 3 year period provided entire payment has been made upfront.
Real Estate private equity (REPE) funds are pooled vehicles registered with SEBI. Duration of these funds is typically 5-7 years. Commitment period of these funds denote time duration during which the money is drawn from the investors and invested in phases. Since the commitment period of these funds are 2-3 years, it offers staggered investment opportunity thereby also reducing the risk of investing the entire money during peak of the cycle.
Since these vehicles are pooled vehicles they provide compounding opportunity due to size and scale of investment. Due to investment in multi cities, concentration risk is also mitigated. Active asset management also reduces the completion and risk associated with quality. Private equity funds are manned by Asset Management professionals with hardcore construction experience to monitor day to day progress of projects invested.
Last but not the least these funds target returns at prevailing end product prices since they are targeting the profit margins of the developer and not the price appreciation. To illustrate: Rs 5000/ sqft can be end product pricing for retail customer but developer and private equity fund may have invested approx 1/3 rd of the price as land cost, the other 1/3rd which is construction cost is financed by retail customer and the balance 1/3rd is the profit margin of the developer and REPE. Hence the appreciation is not the target by REPE whereas direct investor is looking for appreciation as the only means and not managing any risk being addressed by REPE.
These funds are managed by professionals who are real estate experts and they also manage the risk of diversion of money which mitigates the completion risk. It is pertinent to mention that the experience of the fund management team and track record of quality investments with returns is the final barometer for selection of a private equity fund.

The decline in the value of Indian currency and constantly bad performance of real estate sector is become a double bonanza for Non Residential Indians (NRIs) to invest in Indian property market. According to the several market reports and NRIs also said that “in Thane region property prices are 30% less than the usual market prices,” they added that we have decided to buy a property in India as we are expecting an annual 10% to 15% appreciation.
According a flamboyant brokerage firm said that, we have received a huge response from overseas home seeker in the recent month. Adding that in Dubai property exhibition hundreds of NRIs has booked their flats on the spot, whereas several others have put their decisions on hold as first they wanted to observe the locations.
Reportedly, this time Navi Mumbai and Bangalore are on top of the NRIs demand list, though Delhi market got less numbers comparatively previous year. Authorities said that following to the demand we have decided to conduct property exhibitions in in Singapore and other international places that have a large Indian population.
Niranjan Hiranandani, managing director of the Hiranandani Group, said “Reduce in the value of Indian currency against the dollar/dinar in the overseas market has aided to lure NRI home buyers, if the value of a flat is 1crore in Indian market NRI buyer has to pay only Rs.85L- 15percent lesser.”

Owning a home in India is no longer a dream for Non Residential Indian. As homebuyers always looking for serenity and particularly in hometown countryside or in a bustling business centre, investing in an apartment is now making business sense to a large number of Non-Resident Indians (NRIs).
However, far from the home town for decades NRI’s always have a soft corner and emotional touch with country.
And so, it makes emotional sense for an NRI to buy a dream house in India – usually in his city of origin, or close to it. Unlike typical old-fashioned builders, the recent crops of construction companies are building homes of extremely high quality, comparable to the ones that NRIs are living in abroad.
Investing in Indian real estate is not all about the emotions but it has having a business sense that attracting to the hundreds of overseas buyers to put their capital in Indian property market.
While investing in Indian real estate market NRIs keeping several important points such as How to work through the modalities? Who will guide him, organize site visits, tie up the finance? How will he transfer huge sums of money? How will he ensure that the legal paperwork is properly done to safeguard his interest and his family’s peace of mind?
In the earlier times it was very difficult to transfer money from abroad but now e-banking, e-transfer funds and several other online facilities also have make ease for the payment of property deals. Despite the rising prices and increasing home loan rates NRIs are looking to investment in Indian real estate, sources said.

Mumbai:
As 52percent of Indian realty market has been captured by the investors, a high-rise from 2009 the time when investor section formed at that time buyers were only 22percent.
The biggest real estate agency Liases Foras said that “the large number of investor are rising property prices and making unaffordable for the homebuyers, however there is lesser sales.” According to the market analyst, “the contemporary property market is capital obsessed rather than consumption driven.”
The Bill entrusts every state government with the task of setting up a three-member real estate regulatory authority and an appellate tribunal.
The prime purpose to propose a bill is to deter irregularities in property transaction and protect consumer interest and to ensure sale of immovable properties in an efficient and transparent manner.